U.S. Steel’s Q1 2017 Earnings Review: Unexpected Decline In Flat-rolled Shipments Weighs On Results

U.S. Steel released its Q1 2017 earnings result and conducted a conference call with analysts on April 26. ^[1] The company reported losses, contrary to market expectations, as a result of weaker than expected shipment volumes from its U.S. Flat-rolled operations, which account for around 70% of the company’s revenue. Shipment volumes for the U.S. Flat-rolled operations fell 4% year-over-year in Q1 2017 despite improving market conditions (as reflected by the sharp improvements in realized prices). ^[2] The U.S. Flat-rolled shipments fell as the company undertook an overhaul of its operating facilities (as a part of its asset revitalization program) in order to boost the reliability and operational performance of its facilities.

The overhaul of the flat-rolled facilities is likely to weigh on shipments growth for the division going forward, as the maintenance work will likely disrupt shipments in the near term. Our new shipment forecast for the division represents a 15% reduction by the end of our forecast period, as compared to our previous estimate.

In addition, the overhaul of the company’s facilities will result in a sharp increase in capital spending. The company’s revised capital expenditure guidance for 2017 is around 32% higher than its previous estimate. ^[3] In order to account for this increased capital spending, we have revised our capital expenditure forecast, with our new estimate representing 23% higher spending (in absolute terms, not as % of EBITDA) by the end of our forecast period, as compared to the previous estimate.

Besides these two forecasts, we have also lowered our margin forecast for the U.S. Flat-rolled division by 100 basis points. These changes to our forecast have resulted into our new $28.42 price estimate for U.S. Steel.

While U.S. Steel’s results did not match expectations due to company-specific factors, the business environment for steel companies has improved considerably in both the U.S. and Europe. Actions taken by regulatory authorities in both these geographies have led to the dissipation of competition from unfairly traded steel imports. In addition, accelerating economic growth, particularly in the U.S., has led to the firming of demand conditions. This was reflected in the improvements in realized prices for both the U.S. and European operations of the company as well as the sharp increase in shipments for the European operations. While higher oil prices boosted the shipments of the tubular steel division, which produces steels used in oil and gas drilling activities, the division’s realized prices remained under pressure, partly as a result of competition from imported steels.

Thus, the prevailing business environment remains favorable for steel companies despite U.S. Steel’s poor Q1 results. Therefore, the sooner U.S. Steel’s shipments recover from the disruption caused by the asset revitalization program, the more the company can benefit from the favorable business conditions. In addition, the company’s cost reduction initiatives could help prop up results going forward. However, it remains to be seen how soon the company’s operations recover to normal levels. For now, the unexpected disruption in U.S. Steel’s operations could weigh on the company’s stock price in the near term.

Have more questions about U.S. Steel? See the links below.

• Why Did Chinese Steel Exports Decline In February?
• U.S. Steel’s Q1 2017 Earnings Preview: Improved Business Conditions To Translate Into Earnings Growth

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1. U.S. Steel’s Q1 2017 Earnings Call Transcript, Seeking Alpha [↩]
2. U.S. Steel’s Q1 2017 Earnings Release, SEC [↩]
3. U.S. Steel’s Q1 2017 Earnings Presentation, U.S. Steel Website [↩]